A Look Ahead: This Week's ETFs to Watch

Perhaps mercifully the week ahead will be a short one, reduced to just 3.5 trading days because of the New Years Eve and New Years Day holidays. Again, that might be a good thing given the performance of stocks and riskier assets last week. Stocks tumbled for a fifth consecutive day on Friday with the S&P 500 and the Dow Jones Industrial Average sliding by more than one percent each. The S&P 500 is in the midst of a five-day skid, its longest since September, and little relief is in sight. That is because, at least as of this writing, Democrats and Republicans remained at odds over a fiscal cliff resolution. Investors do not need to hear this again: Time is running out. Policymakers are literally down to a matter of hours before scores of Bush-era tax cuts expire and almost $110 billion in spending reductions hit. That number is just for January. The longer the fiscal cliff remains unsolved, odds increase that the full $600 billion in government spending cuts will be seen, draining the U.S. economy in the process. Fiscal cliff headlines mean this could be a tricky week for the bulls and that is a kind assessment. Regardless of what happens on Capitol Hill, expect the following ETFs to be in play. WisdomTree Japan Hedged Equity Fund DXJ The WisdomTree Japan Hedged Equity Fund represents one way of skirting some of the fiscal cliff drama. That is the case because this ETF's bullish performance in recent weeks is tied solely to expectations that new Japanese Prime Minister Shinzo Abe will be successful at forcing the Bank of Japan to engineer at least two percent inflation and unlimited, yen-weakening monetary easing. A weaker yen is good Japan's exporters, not so much for the importers, and DXJ capitalizes on that theme. And capitalize is exactly what DXJ has done. While U.S. stocks were beaten up last week, this ETF gained almost 5.5 percent. iShares MSCI Emerging Markets Minimum Volatility Index Fund EEMV Even in the face of all the fiscal cliff madness, some of the marquee diversified emerging markets ETFs have found ways to hold up. For example, the iShares MSCI Emerging Markets Index Fund EEM lost 0.16 percent week, a performance that looks quite compared to the S&P 500. The iShares MSCI Emerging Markets Minimum Volatility Index Fund was even better as that ETF found a way to close modestly higher on the week. EEMV does not attract the same level of attention EEM or the Vanguard MSCI Emerging Markets ETF VWO, but EEMV is arguably more useful with the fiscal cliff dominating the headlines. There are two reasons for that. First,like EEM and VWO, EEMV obviously keeps investors out of U.S. stocks, the asset class made most vulnerable by the fiscal cliff. Second, this the ideal environment for low volatility ETFs and EEMV's low volatility objective has proven profitable in recent weeks. Since November 7, the day after Election Day and the day when fiscal cliff fears began rising in earnest, EEMV is up more than two percent while the S&P 500 is off 1.1 percent. Market Vectors High-Yield Muni ETF HYD This is one example of an ETF that may not respond well to news of fiscal cliff resolution because that resolution could easily include a significant alteration to the treatment of earned interest on municipal bond investments. Currently, that interest is tax-exempt and has been for about a century. Desperate to generate revenue, politicians from both parties have warmed to the idea of changing the tax treatment of municipal-bond interest. If that happens and the news arrives this week, HYD and its rival municipal bond ETFs could be savagely repudiated. For more on ETFs, click here.